Estate Planning

The Most Common Types of Irrevocable Trusts

Black and Davison

Trusts and Estate Planning

If you have a significant estate and you want to ensure that your assets will be distributed according to your wishes when you die, you’ve probably heard about or even given some consideration to executing an irrevocable trust. As the name implies, an irrevocable trust, once implemented, generally cannot be revoked or invalidated. There are significant benefits to an irrevocable trust, which can be used to:

  • Minimize estate tax consequences
  • Protect assets from creditors
  • Provide for family members who are minors, lack capacity to manage their own affairs, or have any type of special needs

There are literally dozens of different types of irrevocable trusts. In this blog, we will look at irrevocable trusts that can have an impact on potential tax liability.

Irrevocable Trusts That Can Reduce or Avoid Taxes

Managing potential tax liability is often the primary reason for preparing and executing an irrevocable trust. The types of irrevocable trusts that can avoid or reduce taxes include:

  • Charitable trusts – A charitable trust affects potential tax liability by making gifts to charitable organizations. There are three types of charitable trusts:
    • Charitable lead trusts – With this type of charitable trust, you name a charity to receive any income produced by the property in the trust, and another beneficiary to receive the principal in the trust when the trust is terminated.
    • Charitable remainder trusts – This type of trust distributes income to a named beneficiary, with principal given to a charitable organization at the termination of the trust
    • Pooled income trusts – This type of trust allows you to pool assets with other trustors (trust makers) and receive income from the trust for a specific period of time. In most instances, a charitable organization is both trustee and beneficiary of principal.
  • Bypass trusts – This type of trust is used to protect property that would be transferred to a spouse upon death. Instead of being distributed to the spouse, the property is placed in trust. The spouse may receive income from the property or use it (if it’s real property, for example), but never owns the property, so it’s never part of the estate.
  • QTIP trusts – A qualified terminable interest property (QTIP) trust postpones the payment of estate taxes until the death of the surviving spouse.

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